Illinois could save up to $1.2B through local revenue-sharing adjustments.

As the state faces its most pressing budget crisis ever, it is time to rethink how much of its income-tax revenue it can afford to pass back to local governments.

Small adjustments in a state budget can often make a big difference, especially for a new governor trying to make ends meet. One potential fix lies in a seldom-discussed distributive fund within state government.

Since fiscal year 1996, Illinois’ local governments have received 10 percent of the state’s receipts from individual and corporate income taxes. This is done by diverting the tax receipts into the Local Government Distributive Fund, or LGDF, instead of depositing them into the general fund. These funds are then distributed back to municipal and county governments on a per-capita basis for use in their general spending programs.

In 2011, when the individual tax rate rose to 5 percent, the percent of tax receipts going into the LGDF dropped to 6 percent from 10 percent. When the individual tax rate dropped to 3.75 percent from 5 percent on Jan. 1, 2015, the percent of tax receipts going into the LGDF rose to 8 percent from 6 percent. In reality, these changes kept the diversion of tax receipts into the LGDF at an amount equivalent to 10 percent of revenues collected from a 3 percent individual tax rate.

Prior to 1995, the percentage of the state income tax receipts diverted to local government was less than 10 percent. From fiscal year 1969 through fiscal year 1994, 8.3 percent of state income taxes went to the LGDF. For most of that time, the individual income tax rate was 2.5 percent. For fiscal year 1995, the diversion rate was 9.1 percent, increasing to 10 percent thereafter.

State lawmakers have occasionally reconsidered the percentage of income-tax receipts to be diverted into the LGDF, changing that percentage a handful of times throughout the years. As the state faces its most pressing budget crisis ever, it is time to rethink how much of its income-tax revenue it can afford to pass back to local governments.

In fiscal year 2010, the LGDF returned approximately $1.1 billion back to local governments. Five years earlier, in fiscal year 2005, about $900 million was returned to local governments. In fiscal years 2013 and 2014, approximately $1.2 billion was diverted through the LGDF to local governments. The same is expected for fiscal year 2015.

What this data show is that each 1 percent of income-tax receipts, now that the diversion rate is 8 percent, is equivalent to approximately $150 million. This amount should rise a bit with each new year. Several options should be considered by Gov. Bruce Rauner’s administration to retain some of these funds for state purposes.

The new administration can pursue an initiative to reduce the percentage of income-tax funds being diverted into the LGDF, knowing that each 1 percent reduction can save the state $150 million.

Another option that the administration could pursue would be to keep the rate the same, but cap the maximum amount to be diverted. This might be the best approach for planning purposes at both the state and local level. It allows for a clear limit on the amount the state will transfer.

A third option would be to simply put a dollar amount in the law that would be subject to diversion into LGDF for distribution to local governments.

And, of course, some combination of reducing the diversion percentage rate and setting a maximum amount available for diversion could be used.

Whether it means reducing the rate or capping the dollar amount, leaving this potential billion-dollar stone unturned would be unwise for a governor facing a budgetary crisis.